Partnership Dispute Mediation, Negotiation and Support
Practical guidance for business partners facing disagreement, deadlock, financial concerns or the breakdown of a working relationship.
A partnership dispute can place the business, its finances and the relationship between the partners under immediate pressure.
The disagreement may begin with a single decision, an unexplained payment or concerns about one partner’s contribution. It can then develop into allegations about money, access to records, ownership of assets, decision making and who is entitled to continue the business.
At Navigate Business Recovery, we help partners understand the commercial and financial position, identify the issues that need to be resolved and explore whether agreement can be reached through negotiation or mediation.
Where specialist legal advice or Court proceedings are required, we can also help the parties work with an appropriately qualified solicitor or barrister.
What Is a Business Partnership?
A general partnership exists where two or more people carry on a business together with a view to making a profit.
A partnership does not always have to be created by a formal written document. It may arise through an oral agreement or from the way in which the parties have conducted the business. A written Partnership Agreement is nevertheless extremely important because it can define the partners’ rights, responsibilities and arrangements for leaving or ending the partnership.
A general partnership is different from a limited company. In England and Wales, an ordinary partnership is not normally a separate legal person from its partners. Partners may therefore be personally exposed to partnership liabilities. The precise liability for a particular debt will depend on the law, the partnership arrangements and when each person became or ceased to be a partner.
Limited Liability Partnerships operate differently. An LLP is a separate legal entity, and the relationship between its members will usually be governed by an LLP Agreement together with the statutory rules that apply where the agreement is silent.
It is important to establish at the outset whether the business is an ordinary partnership, an LLP, a limited company or simply an informal collaboration. People frequently describe themselves as partners when the legal structure is something quite different.
The Importance of a Partnership Agreement
A well drafted Partnership Agreement can explain how the business is to be managed and what happens when difficulties arise.
It may deal with profit sharing, drawings, capital contributions, decision making, access to information, illness, retirement, misconduct, the admission of new partners and the process for valuing a departing partner’s interest.
The agreement may also contain procedures for resolving deadlock, removing a partner or ending the partnership.
Where there is no written agreement, or the agreement does not address the issue in dispute, the default provisions of the Partnership Act 1890 may apply.
Those default rules may produce an outcome that none of the partners intended. For example, equal participation in management and equal sharing of profits may apply in the absence of a contrary agreement, even where the partners made very different financial or practical contributions.
The first step in any dispute should therefore be to locate and review the Partnership Agreement, together with any later variations, correspondence and evidence of how the partners actually operated the business.
How Partnership Disputes Begin
Partnership disputes rarely arise from one issue alone.
A partner may believe that they are doing most of the work while another continues to receive an equal share of the profits. There may be concerns that money has been withdrawn without authority, expenses have been paid for personal benefit or important decisions have been made without consultation.
Difficulties can also arise where one partner wants to expand or borrow more money while another wishes to reduce risk or retire. The partners may disagree about salaries, drawings, the value of the business or whether a family member should be employed.
Sometimes the business remains profitable, but trust between the partners has disappeared. In other cases, the dispute develops at the same time as serious cash flow problems, tax arrears or creditor pressure.
The commercial and financial position needs to be examined alongside the personal dispute. A settlement that resolves the relationship but leaves the business unable to pay its debts is not a workable outcome.
Disputes About Money and Partnership Accounts
Financial disagreements are among the most common causes of partnership breakdown.
The dispute may concern how profits have been divided, whether drawings were authorised, whether expenses were legitimate or how much capital each partner introduced.
There may also be disagreement about money held in partnership bank accounts, payments to connected parties, tax liabilities, unpaid invoices or assets acquired using partnership funds.
The accounting records should be reviewed carefully. The figures shown in annual accounts do not always resolve the dispute, particularly where transactions have been incorrectly described or records are incomplete.
An independent accounting review may be needed to establish what each partner has contributed, withdrawn or received and what remains due between them.
It is important not to assume that a partner is simply a creditor of the partnership for every amount recorded in their favour. Following dissolution, a proper account may need to be taken before the final balance between the partners can be established.
Access to Bank Accounts, Records and Information
A dispute often becomes worse when one partner controls the bank account, accounting software, customer information or important business documents.
The other partner may be excluded from the premises, removed from online banking or denied access to management information.
The Partnership Agreement and the general law may give partners rights to information and participation in the business. However, a partner should be careful before taking unilateral action that damages the business, removes records or prevents the partnership from meeting its obligations.
Bank mandates, passwords and access rights may need to be protected while preserving sufficient access for the business to continue operating.
Where there is a genuine risk that money or assets will be removed, urgent legal advice may be necessary. Mediation is valuable, but it should not be used as a reason to delay protective Court action where immediate relief is required.
Decision Making and Deadlock
Partners may disagree about who has authority to make decisions and whether a majority can overrule another partner.
The answer will usually depend on the Partnership Agreement and the nature of the decision.
Routine business matters may be dealt with differently from fundamental decisions such as changing the nature of the business, admitting a new partner, selling major assets or borrowing substantial sums.
A two person partnership can become completely paralysed when the partners no longer agree. Neither may be able to move the business forward, but both may have the power to prevent the other from acting.
Deadlock can harm staff, customers and creditors very quickly. A temporary working arrangement may be needed while the parties negotiate a permanent solution.
Can a Partner Be Removed?
A partner cannot necessarily be removed simply because the relationship has become difficult or the other partners have lost confidence in them.
In an ordinary partnership, a power to expel a partner must generally be found in the Partnership Agreement. Any power that exists must be exercised properly and in accordance with its terms.
Attempting to expel a partner without legal authority may itself amount to a breach of the agreement and lead to further claims.
The position may be different in an LLP, where the LLP Agreement may contain detailed provisions for compulsory retirement or removal.
Where misconduct is alleged, the evidence should be examined carefully before formal action is taken. Labels such as dishonesty, fraud or gross misconduct should not be used casually.
Legal advice should be obtained before attempting to remove a partner, exclude them from the business or terminate their access to partnership assets.
Retirement and the Departure of a Partner
A partner may wish to leave because of retirement, ill health, a change in personal circumstances or the breakdown of the relationship.
The Partnership Agreement may set out the notice required, the valuation method and how the departing partner is to be paid.
Disputes often arise about the value of goodwill, work in progress, property, customer relationships and outstanding liabilities. The remaining partners may want to preserve cash in the business, while the departing partner wants immediate payment.
A structured exit may involve instalments, security, the transfer of particular assets or a continuing share of receipts from specified work.
The departure should be documented carefully. It should address responsibility for existing debts, tax, guarantees, banking arrangements, customer communications, use of the business name and release from future obligations.
Retirement from the partnership does not automatically release a partner from liabilities already incurred or from guarantees given personally. Creditors and other contracting parties may need to agree a formal release.
Dissolution of the Partnership
Dissolution means bringing the partnership relationship to an end.
A partnership may be dissolved by agreement, by the expiry or completion of the venture for which it was created, by notice in certain partnerships, or following events such as the death or bankruptcy of a partner, subject to the terms of the Partnership Agreement. The Court also has powers to order dissolution in specified circumstances.
Dissolution is not the same as simply walking away from the business.
The partnership’s affairs must still be wound up. Assets may need to be sold, debts collected, creditors paid and final accounts prepared. Any surplus or shortfall must then be dealt with between the partners.
A notice of dissolution can have serious consequences and should not be given without understanding what it will trigger. In some circumstances, notice by one partner can end the entire partnership.
Where the business remains valuable, the parties may prefer to negotiate the purchase of one partner’s interest or transfer the business into a new structure rather than closing it completely.
Partnership Debts and Personal Exposure
In an ordinary partnership, the partners may be personally liable for partnership debts.
This means that a creditor may be able to pursue individual partners where the partnership cannot pay. The precise position can depend on when the debt arose, who was a partner at that time and the nature of the obligation.
A dispute between partners does not suspend the rights of external creditors.
Even where one partner believes that another should be responsible for a particular debt, the creditor may still have rights against both. Any claim for contribution or indemnity between the partners is a separate matter.
Personal guarantees may create additional exposure. A partner who has guaranteed a loan, lease or supplier account may remain liable even after leaving the partnership unless the creditor agrees to release them.
For that reason, any negotiated exit should consider external liabilities as well as the internal settlement between the partners.
Insolvency and Partnership Disputes
A partnership dispute can cause or accelerate insolvency.
Partners may stop contributing money, suppliers may lose confidence and important decisions may be delayed. One partner may continue spending while another tries to preserve cash.
Where the partnership cannot pay its debts, the interests of creditors and the available insolvency procedures must be considered urgently.
An agreement between the partners cannot safely distribute assets between them while leaving creditors unpaid. Transactions carried out during a dispute may later be examined or challenged if the partnership or an individual partner enters an insolvency process.
Navigate Business Recovery can help assess the financial position alongside the partnership dispute and identify where advice from a licensed insolvency practitioner is required.
Mediation of Partnership Disputes
Mediation can be particularly effective in partnership disputes because the issues are rarely purely legal.
The partners may need to agree what happens to the business, staff, customers, premises, assets and liabilities. A Court may determine particular rights, but it may not provide the flexible commercial solution the parties need.
Mediation gives the partners a confidential and structured opportunity to discuss the dispute with an independent mediator.
Possible outcomes may include one partner buying out another, the sale of the business, an agreed division of assets, revised management arrangements, a repayment plan or an orderly dissolution.
The mediator remains impartial and does not decide who is right or impose a settlement. Each partner retains control over whether an agreement is reached.
Where terms are agreed, they should be recorded in a properly drafted settlement or exit agreement. The partners should obtain independent legal and tax advice before entering into a binding arrangement where appropriate.
When Mediation May Not Be Enough
Mediation will not be suitable as the only immediate step in every dispute.
Urgent legal action may be needed where there is evidence that a partner is removing money, destroying records, diverting customers or disposing of assets.
Court involvement may also be necessary where the legal status of the partnership is disputed, a partner refuses to provide information or the parties cannot agree how the business should be preserved.
Mediation may still take place after protective steps have been taken or while proceedings are underway.
The important point is to distinguish between what needs immediate legal protection and what can be resolved through negotiation.
How Navigate Business Recovery Can Help
We help partners understand the commercial, financial and insolvency issues surrounding a dispute.
Our work may include reviewing the Partnership Agreement and financial records, identifying the main areas of disagreement, establishing the partnership’s current financial position and helping the parties consider realistic options.
We can assist with negotiations over a partner’s exit, repayment of drawings or capital, the division of assets, personal guarantees and the continuation or closure of the business.
As a Civil and Commercial Mediator, Vee can also provide an independent mediation process where all parties agree to participate.
Navigate Business Recovery does not conduct litigation or provide legal representation. Where the dispute requires legal advice, urgent Court action or the drafting of a binding settlement agreement, we can refer the parties to appropriately qualified solicitors or barristers.
Where dissolution or insolvency requires a formal appointment, we can also introduce the parties to a licensed insolvency practitioner to carry out the necessary process.
Why Early Action Matters
Partnership disputes become harder to resolve once money has been removed, staff have left, customers have been approached or Court proceedings have begun.
Early action allows the partners to protect the business, preserve information and establish whether a negotiated solution remains possible.
It also creates an opportunity to separate personal grievances from the decisions needed to protect customers, employees and creditors.
The aim is not always to preserve the partnership. Sometimes the best result is a fair and organised separation. The important point is to reach that outcome without destroying the value of the business along the way.
Next Steps
If you are involved in a partnership dispute, facing deadlock or considering leaving or dissolving a partnership, you can book a meeting with Vee to discuss the position and the available options.
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